<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _________ TO _________.
COMMISSION FILE NO.: 1-12996
-------
ADVOCAT INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1559667
----------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067
-------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 771-7575
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
--------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
5,491,621
------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF SEPTEMBER 30, 2000)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,585 $ 1,913
Receivables, less allowance for doubtful
accounts of $5,078 and $4,958,
respectively 12,428 11,719
Inventories 711 754
Prepaid expenses and other assets 1,945 813
-------- --------
Total current assets 18,669 15,199
-------- --------
PROPERTY AND EQUIPMENT, at cost 88,902 87,667
Less accumulated depreciation
and amortization (22,489) (19,015)
-------- --------
Net property and equipment 66,413 68,652
-------- --------
OTHER ASSETS:
Deferred financing and other costs, net 705 939
Assets held for sale or redevelopment 1,476 1,476
Investments in and receivables from joint ventures 8,570 8,126
Other 1,814 1,793
-------- --------
Total other assets 12,565 12,334
-------- --------
$ 97,647 $ 96,185
======== ========
</TABLE>
(Continued)
2
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 13,719 $ 53,098
Trade accounts payable 6,554 7,984
Income taxes payable 72 -0-
Accrued expenses:
Payroll and employee benefits 4,302 4,001
Interest 212 221
Self-insurance reserves 3,174 3,508
Other 6,573 3,086
-------- --------
Total current liabilities 34,606 71,898
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 45,631 7,827
Deferred gains with respect to leases, net 2,862 3,047
Self-insurance reserves, less current portion 3,297 2,268
Other 4,971 4,878
-------- --------
Total noncurrent liabilities 56,761 18,020
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -0- -0-
Common stock, authorized 20,000,000 shares,
$.01 par value, 5,492,000 and 5,399,000 issued
and outstanding at September 30, 2000 and
December 31, 1999, respectively 55 55
Paid-in capital 15,907 15,907
Accumulated deficit (9,682) (9,695)
-------- --------
Total shareholders' equity 6,280 6,267
-------- --------
$ 97,647 $ 96,185
======== ========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated balance sheets.
3
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------- --------
<S> <C> <C>
REVENUES:
Patient revenues $38,946 $ 33,865
Resident revenues 10,368 9,735
Management fees 934 860
Interest 53 40
------- --------
Net revenues 50,301 44,500
------- --------
EXPENSES:
Operating 38,598 39,710
Lease 5,272 5,251
General and administrative 3,058 3,482
Interest 1,542 1,494
Depreciation and amortization 1,239 1,152
Non-recurring charges 359 -0-
------- --------
Total expenses 50,068 51,089
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 233 (6,589)
PROVISION (BENEFIT) FOR INCOME TAXES 84 (2,372)
------- --------
NET INCOME (LOSS) $ 149 $ (4,217)
------- --------
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $ .03 $ (.77)
======= ========
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) $ .03 $ (.77)
======= ========
WEIGHTED AVERAGE SHARES:
Basic 5,492 5,492
======= ========
Diluted 5,492 5,492
======= ========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
4
<PAGE> 5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------- ---------
<S> <C> <C>
REVENUES:
Patient revenues $111,620 $ 105,071
Resident revenues 31,177 27,962
Management fees 2,960 2,656
Interest 144 113
-------- ---------
Net revenues 145,901 135,802
-------- ---------
EXPENSES:
Operating 112,193 115,466
Lease 15,806 15,155
General and administrative 8,754 9,372
Interest 4,432 4,126
Depreciation and amortization 3,614 3,447
Non-recurring charges 622 -0-
-------- ---------
Total expenses 145,421 147,566
-------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 480 (11,764)
PROVISION (BENEFIT) FOR INCOME TAXES 173 (4,235)
-------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 307 (7,529)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -0- (277)
-------- ---------
NET INCOME (LOSS) $ 307 $ (7,806)
======== =========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .06 $ (1.39)
Cumulative effect of change in accounting principle,
net of tax -0- (.05)
-------- ---------
Net income (loss) $ .06 $ (1.44)
======== =========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before accounting change $ .06 $ (1.39)
Cumulative effect of change in accounting principle,
net of tax -0- (.05)
-------- ---------
Net income (loss) $ .06 $ (1.44)
======== =========
WEIGHTED AVERAGE SHARES:
Basic 5,492 5,430
======== =========
Diluted 5,492 5,430
======== =========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
5
<PAGE> 6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
----- ------- ----- -------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 149 $(4,217) $ 307 $(7,806)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments (138) (47) (459) 250
Income tax (provision) benefit 50 17 165 (90)
----- ------- ----- -------
(88) (30) (294) 160
----- ------- ----- -------
COMPREHENSIVE INCOME (LOSS) $ 61 $(4,247) $ 13 $(7,646)
===== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
6
<PAGE> 7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 307 $ (7,806)
Items not involving cash:
Depreciation and amortization 3,614 3,447
Provision for doubtful accounts 2,046 5,466
Equity loss in joint ventures 27 50
Amortization of deferred balances (228) 814
Deferred income taxes -0- (3,763)
Write off pursuant to change in accounting principle -0- 433
Increase in TDLP impairment reserve -0- 500
Changes in other assets and liabilities:
Receivables (2,755) 8,716
Inventories 43 193
Prepaid expenses and other assets (935) 435
Trade accounts payable and accrued expenses 3,233 (3,178)
Other -0- 97
------- --------
Net cash provided from operating activities 5,352 5,404
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,338) (3,740)
Investment in TDLP -0- (160)
Mortgages receivable, net 315 162
Deposits, pre-opening costs and other (336) 671
Investment in and advances to joint ventures, net (629) (979)
TDLP partnership distributions 158 257
------- --------
Net cash used in investing activities (1,830) (3,789)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations -0- 26,345
Repayment of debt obligations (1,352) (25,419)
Net proceeds from (repayment of) bank line of credit (223) (2,950)
Proceeds from sale of common stock -0- 144
Advances to TDLP, net (49) (561)
Increase in lease obligations 68 140
Financing costs -0- (480)
------- --------
Net cash used in financing activities (1,556) (2,781)
------- --------
EFFECT OF EXCHANGE RATE CHANGES (294) 160
</TABLE>
(Continued)
7
<PAGE> 8
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 1,672 $(1,006)
CASH AND CASH EQUIVALENTS, beginning of period 1,913 2,347
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 3,585 $ 1,341
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 4,618 $ 4,781
======= =======
Cash payments (refunds) of income taxes, net $ (100) $ (589)
======= =======
</TABLE>
During the second quarter of 1999, the Company's executive benefit plan was
terminated. In connection therewith, Advocat distributed net benefit plan
deposits and relieved net benefit plan liabilities of $1,124,000 in the nine
months ended September 30, 1999.
The accompanying notes are an integral part of these
interim consolidated financial statements.
8
<PAGE> 9
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and four
Canadian provinces. The Company's facilities provide a range of health care
services to their patients and residents. In addition to the nursing, personal
care and social services usually provided in long-term care facilities, the
Company offers a variety of comprehensive rehabilitation services as well as
medical supply and nutritional support services.
As of September 30, 2000, the Company operates 120 facilities consisting of 64
nursing homes with 7,230 licensed beds and 56 assisted living facilities with
5,472 units. The Company owns seven nursing homes, leases 36 others, and manages
21 nursing homes. The Company owns 16 assisted living facilities, leases 25
others, and manages the remaining 15 assisted living facilities. The Company
holds a minority interest in seven of these managed assisted living facilities.
The Company operates 51 nursing homes and 33 assisted living facilities in the
United States and 13 nursing homes and 23 assisted living facilities in Canada.
The Company operates facilities in Alabama, Arkansas, Florida, Georgia,
Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West
Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia
and Ontario.
In recent periods, the long-term health care environment has undergone
substantial change with regards to reimbursement and other payor sources,
compliance regulations, competition among other health care providers and
relevant patient liability issues. The Company continually monitors these
industry developments as well as other factors that affect its business. See
Item 2 for further discussion of recent changes in the long-term health care
industry and the related impact on the operations of the Company.
2. BASIS OF FINANCIAL STATEMENTS
The interim consolidated financial statements for the three and nine month
periods ended September 30, 2000 and 1999, included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management of the Company, the
accompanying interim consolidated financial statements reflect all adjustments
necessary to present fairly the financial position at September 30, 2000 and the
results of operations for the three and nine month periods ended September 30,
2000 and 1999, and the cash flows for the nine month periods ended September 30,
2000 and 1999.
9
<PAGE> 10
The results of operations for the three and nine month periods ended September
30, 2000 and 1999 are not necessarily indicative of the operating results for
the entire respective years. These interim consolidated financial statements
should be read in connection with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133, as amended by SFAS No. 137, "Deferral of the Effective Date of SFAS No.
133," is effective for fiscal quarters beginning after June 15, 2000. The impact
of the adoption of SFAS No. 133 is not expected to have a material impact on the
Company's results of operations or financial position.
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5, issued by the
Accounting Standards Executive Committee, requires that the cost of start-up
activities be expensed as these costs are incurred. Start-up activities include
one-time activities and organization costs. Upon adoption, the Company incurred
a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the
write off of all previously deferred balances. This write off has been reported
as the cumulative effect of a change in accounting principle in the accompanying
interim consolidated statement of operations.
4. LEASE AMENDMENTS AND DEBT REFINANCING
On November 8, 2000, the Company entered into a 10-year restructured lease
agreement (the "Settlement and Restructuring Agreement") with its primary
lessor, Omega Health Investors, Inc. ("Omega"). The Settlement and Restructuring
Agreement, effective as of October 1, 2000, provides for reduced future lease
costs covering 30 of its 61 leased facilities through the term of the lease
expiring September 30, 2010, settlement of unpaid rent, a cancellation of
outstanding letters of credit, and a waiver of all defaults under previous lease
agreements with Omega. The Company has agreed under the Settlement and
Restructuring Agreement to issue Omega a subordinated note in the amount of $1.7
million and 393,658 shares of the Company's convertible preferred stock.
Interest on the subordinated note is payable quarterly and accrues at a rate of
7% per annum with any unpaid principal and interest becoming due September 30,
2007. The Company's preferred stock is entitled to a quarterly dividend at a
rate of 7% per annum convertible into common stock at an initial conversion rate
of 1.7949 shares of the Company's common stock for each share of preferred stock
upon demand by Omega resulting in Omega holding up to 9.99% of the Company's
outstanding common stock. The preferred stock also has a liquidation preference
of $3.3 million plus accrued but unpaid dividends and is subject to redemption
at $3.3 million plus accrued but
10
<PAGE> 11
unpaid dividends upon a default under the lease or on September 30, 2007. The
Company has also issued a $5.0 million subordinated note which accrues interest
at a rate of 11.0% per annum and becomes payable at the expiration of the term
of the restructured lease. The Settlement and Restructuring Agreement provides
Omega will agree to forgive the $5.0 million subordinated note plus any accrued
but unpaid interest upon the transference of specified property and equipment
located in the covered facilities to Omega at the expiration of the term of the
restructured lease. The Company will account for the net effect of the issuance
of the subordinated notes and preferred stock as costs of the restructured
lease which will be amortized over the 10-year term of the lease beginning
October 1, 2000.
As a result of the Company's execution of the Settlement and Restructuring
Agreement with Omega, the Company amended previously existing loan agreements
with its primary lender. The amended loan agreements establish new promissory
notes and a working capital line for all of the $13.6 million outstanding to the
lender at September 30, 2000 and extends the maturity dates ranging from January
15, 2002 through September 30, 2004. Under the amended loan agreements, the
promissory notes and working capital line of credit will bear interest at a rate
of 9.5% and prime plus .5%, respectively. Effective with the execution of the
amended loan agreement, the Company is now in compliance with its debt covenants
resulting in an additional $38.1 million of debt being reclassified to long
term. Effective with the execution of the amended loan agreement, the Company
is in compliance with the debt covenants related to the $13.6 million owed to
its primary lender and the $24.5 million mortgage payable owed to a commercial
finance company, resulting in $38.1 million of debt being reclassified to
long-term.
The Company anticipates it will incur additional non-recurring charges in
connection with the restructured lease and loan agreements which will be
recorded in the fourth quarter of 2000. See Note 7 for further discussion of
non-recurring charges recorded by the Company.
As of the date of the filing of this Report on Form 10-Q, the Company has an
acquisition line of credit which had amounts outstanding of $11.1 million at
September 30, 2000. No further draws are available under the acquisition line of
credit. Amounts outstanding under this line had a maturity date of April 30,
2000, which had been previously extended. On September 27, 2000, the lender
again extended the maturity date to November 30, 2000. The Company and the
lender are negotiating replacement long-term financing which the Company expects
to have completed prior to December 31, 2000. If the Company is unable to
refinance the acquisition line of credit and the lender demands immediate
repayment, the Company would be unable to repay the related debt outstanding
which would have an adverse impact on the financial position, operations and
cash flows of the Company. This debt is secured by the assets of four facilities
that are owned and operated by the Company.
The Company believes that, as a result of the restructuring agreements and
anticipated acquisition line of credit refinancing referred to above, internally
generated cash flows from earnings and existing cash balances will be sufficient
to fund existing debt obligations through fiscal year 2001.
5. RECLASSIFICATIONS
Certain amounts in the 1999 interim financial statements have been reclassified
to conform with the 2000 presentation.
6. OTHER COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net
income.
11
<PAGE> 12
Information with respect to the accumulated other comprehensive income balance
is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Foreign currency items:
Beginning balance $(379,000) $(222,000) $(173,000) $(412,000)
Current period change, net of income tax (88,000) (30,000) (294,000) 160,000
--------- --------- --------- ---------
Ending balance $(467,000) $(252,000) $(467,000) $(252,000)
--------- --------- --------- ---------
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
7. NON-RECURRING CHARGES
During 2000, the Company recorded non-recurring charges totaling $622,000 in
connection with the restructuring of the lease arrangements covering the
majority of its United States nursing facilities and the refinancing of certain
debt obligations. See Note 4 for further discussion of the restructured lease
arrangements and refinanced debt obligations.
Information with respect to these charges is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
Consulting fees $233,000 $391,000
Legal fees 125,000 215,000
Other 1,000 16,000
-------- --------
$359,000 $622,000
-------- --------
</TABLE>
8. OPERATING SEGMENT INFORMATION
The Company has four reportable segments: U.S. nursing homes, U.S. assisted
living facilities, Corporate operations, and Canadian operations, which consists
of both nursing home and assisted living services. Management evaluates each of
these segments independently due to the geographic, reimbursement, marketing,
and regulatory differences between the segments. Management evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains and losses and foreign exchange gains and losses.
The following information is derived from the Company's segments' internal
financial statements and includes information related to the Company's
unallocated corporate revenues and expenses:
12
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
(IN THOUSANDS) 2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues:
U.S. nursing homes $ 38,390 $ 33,371 $ 110,068 $ 103,707
U.S. assisted living facilities 7,972 7,426 24,068 21,105
Canadian operations 3,947 3,713 11,775 11,050
Corporate (8) (10) (10) (60)
-------- -------- --------- ---------
Total $ 50,301 $ 44,500 $ 145,901 $ 135,802
======== ======== ========= =========
Depreciation and amortization:
U.S. nursing homes $ 698 $ 593 $ 1,995 $ 1,794
U.S. assisted living facilities 425 436 1,271 1,321
Canadian operations 97 99 293 274
Corporate 19 24 55 58
-------- -------- --------- ---------
Total $ 1,239 $ 1,152 $ 3,614 $ 3,447
======== ======== ========= =========
Operating income (loss):
U.S. nursing homes $ 893 $ (6,440) $ 1,718 $ (10,573)
U.S. assisted living facilities (132) (286) (127) (461)
Canadian operations 483 436 1,328 1,246
Corporate (652) (299) (1,817) (1,976)
-------- -------- --------- ---------
Total $ 592 $ (6,589) $ 1,102 $ (11,764)
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Long-lived assets:
U.S. nursing homes $ 32,069 $ 32,777
U.S. assisted living facilities 33,535 34,332
Canadian operations 12,235 12,933
Corporate 1,139 944
-------- --------
Total $ 78,978 $ 80,986
======== ========
Total assets:
U.S. nursing homes $ 56,935 $ 55,796
U.S. assisted living facilities 36,000 36,309
Canadian operations 16,467 16,737
Corporate 1,945 1,134
Eliminations (13,700) (13,791)
-------- --------
Total $ 97,647 $ 96,185
======== ========
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and four
Canadian provinces. The Company's facilities provide a range of health care
services to their patients and residents. In addition to the nursing, personal
care and social services usually provided in long-term care facilities, the
Company offers a variety of comprehensive rehabilitation services as well as
medical supply and nutritional support services. The Company completed its
initial public offering in May 1994; however, its operational history can be
traced to February 1980 through common senior management who were involved in
different organizational structures.
As of September 30, 2000, the Company operates 120 facilities, consisting of 64
nursing homes with 7,230 licensed beds and 56 assisted living facilities with
5,472 units. In comparison, at September 30, 1999, the Company operated 122
facilities composed of 65 nursing homes containing 7,307 licensed beds and 57
assisted living facilities containing 5,320 units. As of September 30, 2000, the
Company owns seven nursing homes, leases 36 others and manages the remaining 21
nursing homes. Additionally, the Company owns 16 assisted living facilities,
leases 25 others and manages the remaining 15 assisted living facilities. The
Company holds a minority interest in seven of these managed assisted living
facilities. The Company operates 51 nursing homes and 33 assisted living
facilities in the United States and 13 nursing homes and 23 assisted living
facilities in Canada.
Basis of Financial Statements. The Company's patient and resident revenues
consist of the fees charged for the care of patients in the nursing homes and
residents of the assisted living facilities owned and leased by the Company.
Management fee revenues consist of the fees charged to the owners of the
facilities managed by the Company. The management fee revenues are based on the
respective contractual terms of the Company's management agreements, which
generally provide for management fees ranging from 3.5% to 6.0% of the net
revenues of the managed facilities. As a result, the level of management fees is
affected positively or negatively by the increase or decrease in the average
occupancy level rates of the managed facilities. The Company's operating
expenses include the costs, other than lease, depreciation and amortization
expenses, incurred in the operation of the nursing homes and assisted living
facilities owned and leased by the Company. The Company's general and
administrative expenses consist of the costs of the corporate office and
regional support functions, including the costs incurred in providing management
services to other owners. The Company's depreciation, amortization and interest
expenses include all such expenses across the range of the Company's operations.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED SEPT. 30,
----------------------------
2000 1999 CHANGE %
------- -------- ------- ------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $38,946 $ 33,865 $ 5,081 15.0%
Resident revenues 10,368 9,735 633 6.5
Management fees 934 860 74 8.6
Interest 53 40 13 32.5
------- -------- -------
Net revenues 50,301 44,500 5,801 13.0
------- -------- -------
EXPENSES:
Operating 38,598 39,710 (1,112) (2.8)
Lease 5,272 5,251 21 .4
General and administrative 3,058 3,482 (424) (12.2)
Interest 1,542 1,494 48 3.2
Depreciation and amortization 1,239 1,152 87 7.6
Non-recurring charges 359 -0- 359 N/A
------- ------- -------
Total expenses 50,068 51,089 (1,021) (2.0)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 233 (6,589) 6,822 103.5
PROVISION (BENEFIT) FOR INCOME TAXES 84 (2,372) 2,456 103.5
------- -------- -------
NET INCOME (LOSS) $ 149 $ (4,217) $ 4,366 103.5
======= ======== =======
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
(IN THOUSANDS) NINE MONTHS ENDED SEPT. 30,
---------------------------
2000 1999 CHANGE %
-------- --------- -------- -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $111,620 $ 105,071 $ 6,549 6.2%
Resident revenues 31,177 27,962 3,215 11.5
Management fees 2,960 2,656 304 11.4
Interest 144 113 31 27.4
-------- --------- --------
Net revenues 145,901 135,802 10,099 7.4
-------- --------- --------
EXPENSES:
Operating 112,193 115,466 (3,273) (2.8)
Lease 15,806 15,155 651 4.3
General and administrative 8,754 9,372 (618) (6.6)
Interest 4,432 4,126 306 7.4
Depreciation and amortization 3,614 3,447 167 4.8
Non-recurring charges 622 -0- 622 N/A
-------- --------- --------
Total expenses 145,421 147,566 (2,145) (1.5)
-------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 480 (11,764) 12,244 104.1
PROVISION (BENEFIT) FOR INCOME TAXES 173 (4,235) 4,408 104.1
-------- --------- --------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 307 (7,529) 7,836 104.1
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX -0- (277) 277 100.0
-------- --------- --------
NET INCOME (LOSS) $ 307 $ (7,806) $ 8,113 103.9
======== ========= ========
</TABLE>
16
<PAGE> 17
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues 77.4% 76.1% 76.5% 77.4%
Resident revenues 20.6 21.9 21.4 20.6
Management fees 1.9 1.9 2.0 1.9
Interest 0.1 0.1 0.1 0.1
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
EXPENSES:
Operating 76.7 89.2 76.9 85.0
Lease 10.5 11.8 10.8 11.2
General and administrative 6.1 7.8 6.0 6.9
Interest 3.1 3.4 3.0 3.0
Depreciation and amortization 2.5 2.6 2.5 2.5
Non-recurring charges 0.7 0.0 0.4 0.0
----- ----- ----- -----
Total expenses 99.6 114.8 99.6 108.6
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 0.5 (14.8) 0.3 (8.6)
PROVISION (BENEFIT) FOR INCOME TAXES 0.2 (5.3) 0.1 (3.1)
----- ----- ----- -----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 0.3 (9.5) 0.2 (5.5)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX 0.0 0.0 0.0 (0.2)
----- ------ ------ -----
NET INCOME (LOSS) 0.3% (9.5)% 0.2% (5.7)%
===== ====== ====== =====
</TABLE>
GENERAL
Medicare and Other Reimbursement Changes. During 1997, the Federal government
enacted the Balanced Budget Act of 1997 ("BBA"), which contains numerous
Medicare and Medicaid cost-saving measures. The BBA requires that nursing homes
transition to a prospective payment system ("PPS") under the Medicare program
during a three-year "transition period," which began for most of the Company's
facilities on January 1, 1999. In general, PPS provides a standard payment for
Medicare Part A services to all providers regardless of their current costs. PPS
creates an incentive for providers to reduce their costs, and management has
reduced operating expenses in an effort to offset the revenue reductions
resulting from PPS. Revenues and expenses have been reduced significantly from
the levels prior to PPS.
Cost restrictions placed on the provision of rehabilitation (ancillary) services
as a result of the BBA have also been significant. Beginning in January 1998,
the allowable costs for cost reimbursement components of Medicare Part B
services became subject to a limitation factor of 90.0% of actual costs. In
1999, the cost reimbursement system for rehabilitation services has been
replaced by a system of fee screens that effectively limit reimbursement and
place caps on the maximum fees that
17
<PAGE> 18
may be charged for therapy services. Historically, the Company subcontracted the
provision of these therapy services. However, in response to the deep cuts in
fees for service, the Company's therapy subcontractor exited the business. In
June 1999, the Company began providing such services in-house. These changes
with respect to Part B reimbursement have combined to cause a dramatic decrease
in the Company's ancillary services revenues and expenses.
To date, one of the major impacts on the Company from PPS and other BBA
reimbursement changes has been the indirect impact of Medicare occupancy
declines, which have reduced the amount of overhead absorbed under the Company's
Medicare operations. With respect to Medicare therapy allowable cost and fee
reductions, the Company estimates that net operations have been negatively
impacted in both 2000 and 1999 and will continue to be negatively impacted
beyond 2000 as a result of the changes brought about under the BBA. However,
since PPS and other changes brought about by the BBA are still an evolving
process, the ultimate impact of the BBA cannot be known with certainty at this
time.
These changes that have occurred as a result of the administrative
implementation of the guidelines contained in the BBA have affected the entire
long-term care industry. Under the BBA, Medicare expenditures by the Federal
government have been cut more than 20.0%. This has been a sudden, drastic blow
to the industry. Other providers who relied more heavily on the provision of
services to higher acuity patients have been impacted more severely than the
Company. There have already been several major bankruptcy filings. Without
remediation, the long-term effect on the industry is expected to be
catastrophic.
As the impact of these changes upon both providers and beneficiaries has become
known, there has been growing political awareness of a need to re-examine the
drastic cuts that have been implemented. On November 29, 1999 President Clinton
signed into law a budget agreement that restores $2.7 billion in Medicare
funding over three years. The bill contains several components that become
effective at various times over the three-year period. As a result of the
legislation, individual nursing facilities have the option, for cost reporting
years beginning after December 29, 1999, of continuing under the current PPS
transition formula or adopting the full federal PPS per diem.
During 2000, the Company has elected to adopt the full federal PPS per diem on
several facilities. In addition, the bill provides a two-year moratorium on the
Part B therapy caps beginning January 1, 2000, and it also provides increases in
the per diems for the care of certain groups of patients. The Company is
continuing to evaluate the impact of the legislation on its operations. However,
there is no expectation by management that the relief will be sufficient to
restore the economic viability the industry needs.
While federal regulations do not provide states with grounds to curtail funding
of their Medicaid cost reimbursement programs due to state budget deficiencies,
states have nevertheless curtailed funding in such circumstances in the past.
The United States Supreme Court ruled in 1990 that healthcare providers could
use the Boren Amendment to require states to comply with their legal obligation
to adequately fund Medicaid programs. The BBA repeals the Boren Amendment and
authorizes states to develop their own standards for setting payment rates. It
requires each state to use a public process for establishing proposed rates
whereby the methodologies and justifications used for setting such rates are
available for public review and comment. This requires facilities to become more
involved
18
<PAGE> 19
in the rate setting process since failure to do so may interfere with a
facility's ability to challenge rates later. As a result, the Company expects
states to continue to attempt to reduce spending under the Medicaid programs.
The Company will attempt to maximize the revenues available to it from
governmental sources within the changes that have occurred and will continue to
occur under the BBA. In addition, the Company will attempt to increase revenues
from non-governmental sources, including expansion of its assisted living and
Canadian operations to the extent capital is available to do so, if at all.
However, current levels of, or further reductions in, government spending for
long-term health care are expected to continue to have an adverse effect on the
operating results and cash flows of the Company.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Net revenues increased to $50.3 million in 2000 from $44.5 million in
1999, an increase of $5.8 million, or 13.0%. Patient revenues increased to $38.9
million in 2000 from $33.9 million in 1999, an increase of $5.0 million, or
15.0%. The increase in patient revenues can be attributed to increased Medicare
utilization and PPS rate increases at several facilities which became effective
April 2000. Several facilities in Tennessee also received $1.3 million in
retroactive rate increases from the state in August 2000. However, the Company
closed a facility in July 2000 which had an estimated negative impact on 2000
patient revenues of $300,000. The increase in patient revenues can also be
attributed to negative revenue adjustments totaling $1.3 million which were
recorded in 1999 related to reimbursement issues. The negative revenue
adjustments recorded in 1999 included incentive payments which were
retroactively recouped by the state of Alabama related to 1997 decertification
issues and revenue that was reversed resulting from expected rate increases in
the state of Arkansas which became uncertain. Resident revenues increased to
$10.4 million in 2000 from $9.7 million in 1999, an increase of $633,000, or
6.5%. The addition of three United States assisted living facilities which were
opened during the second quarter of 1999 and rate increases related to the
reimbursement of additional required personnel at the majority of the United
States assisted living facilities account for a majority of the increase in
resident revenues in 2000. As a percentage of patient and resident revenues,
Medicare increased to 18.5% in 2000 from 17.1% in 1999 while Medicaid and
similar programs increased to 68.7% in 2000 from 63.5% in 1999.
Operating Expense. Operating expense decreased to $38.6 million in 2000 from
$39.7 million in 1999, a decrease of $1.1 million, or 2.8%. The Company
continues to implement cost reductions in response to Medicare reimbursement
changes. As a percentage of patient and resident revenues, operating expense
decreased to 78.3% in 2000 from 91.1% in 1999. The largest component of
operating expenses is wages, which increased to $21.2 million in 2000 from $20.0
million in 1999, an increase of $1.2 million, or 6.0%. Savings from staff
reductions have been offset by increased wage levels due to higher labor markets
in most of the areas in which the Company operates. The Company's wage increases
are generally in line with inflation. However, effective February 2000, the
Company increased staffing at a majority of its United States assisted living
facilities to meet state regulatory requirements which the Company estimates has
increased wage expense by $250,000. The Company's provision for doubtful
accounts decreased to $700,000 in 2000 from $2.8 million in 1999, a decrease of
$2.1 million, or 75.0%. In 1999, the Company determined a substantial
19
<PAGE> 20
portion of its older patient receivables should be reserved. The Company
recognized a charge of $493,000 in 1999 to provide additional reserves for the
self-insured portion of liability claims incurred prior to 1998. The 1999 period
also included provisions of $279,000 for additional workers' compensation
liabilities and $498,000 for the write-off of miscellaneous assets.
Lease Expense. Lease expense remained flat at $5.2 million in 2000 and 1999.
Adjustments in the Company's lease agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense decreased
to $3.1 million in 2000 from $3.5 million in 1999, a decrease of $424,000, or
12.2%. As a percentage of total net revenues, general and administrative expense
decreased to 6.1% in 2000 compared with 7.8% in 1999. In 1999, the Company
recognized a charge of $500,000 due to further impairment of its investment in
Texas Diversicare Limited Partnership ("TDLP"), a limited partnership for which
the company serves as a general partner.
Interest Expense. Interest expense remained flat at $1.5 million in 2000 and
1999.
Depreciation and Amortization. Depreciation and amortization expense increased
to $1.2 million from $1.1 million in 1999, an increase of $87,000, or 7.6%.
Non-Recurring Charges. During the third quarter of 2000, the Company recorded
non-recurring charges totaling $359,000 in connection with the restructuring of
the lease arrangements covering the majority of its United States nursing
facilities and the refinancing of certain debt obligations. Of this amount,
$233,000 and $125,000 related to consulting and legal fees incurred,
respectively.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, income before income taxes was $233,000 in 2000 as
compared with a loss of $6.6 million in 1999, an increase of $6.8 million, or
103.5%. The effective combined federal, state and provincial income tax rate was
36.0% in both 2000 and 1999. Net income was $149,000 in 2000 as compared with a
net loss of $4.2 million in 1999, an increase of $4.4 million, or 103.4%, and
basic and diluted earnings per share was $.03 in 2000 as compared with a loss of
$.77 per share in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Net revenues increased to $145.9 million in 2000 from $135.8 million
in 1999, an increase of $10.1 million, or 7.4%. Patient revenues increased to
$111.6 million in 2000 from $105.1 million in 1999, an increase of $6.5 million,
or 6.2%. The increase in patient revenues can be attributed to increased
Medicare utilization and PPS rate increases at several facilities which became
effective April 2000. Several facilities in Tennessee also received $1.3 million
in retroactive rate increases from the state in August 2000. However, the
Company closed a facility in July 2000 which had an estimated negative impact on
2000 patient revenues of $300,000. The Company also recorded negative revenue
adjustments in 1999 related to incentives which were retroactively recouped by
the state of Alabama related to 1997 decertification issues and revenue that was
reversed resulting from expected rate increases in the state of Arkansas which
became uncertain. Taken together, these reimbursement issues, along with other
miscellaneous matters, accounted for approximately $2.0
20
<PAGE> 21
million in reduced revenues in 1999. Resident revenues increased to $31.2
million in 2000 from $28.0 million in 1999, an increase of $3.2 million, or
11.5%. The addition of three United States assisted living facilities which were
opened during the second quarter of 1999 and rate increases related to the
reimbursement of additional required personnel at the majority of the United
States assisted living facilities account for a majority of the increase in
resident revenues in 2000. As a percentage of patient and resident revenues,
Medicare increased to 19.0% in 2000 from 15.5% in 2000 while Medicaid and
similar programs increased to 67.9% in 2000 from 65.6% in 1999.
Operating Expense. Operating expense decreased to $112.2 million in 2000 from
$115.5 million in 1999, a decrease of $3.3 million, or 2.8%. The Company
continues to implement cost reductions in response to the Medicare reimbursement
changes. As a percentage of patient and resident revenues, operating expense
decreased to 78.6% in 2000 from 86.8% in 1999. The largest component of
operating expense is wages, which increased to $61.5 million in 2000 from $57.6
million in 1999, an increase of $3.9 million, or 6.7%. Savings from staff
reductions have been offset by increased wage levels due to higher labor markets
in most of the areas in which the Company operates. The Company's wage increases
are generally in line with inflation. However, effective February 2000, the
Company increased staffing at a majority of its United States assisted living
facilities to meet state regulatory requirements which the Company estimates has
increased wage expense by $650,000. The Company's provision for bad debts
decreased to $2.2 million in 2000 from $6.1 million in 1999, a decrease of $3.9
million, or 63.9%. In 1999, the Company determined a substantial portion of its
older receivables should be reserved. The Company is self-insured for certain
workers' compensation claims incurred prior to May 1997. In 1999, the Company
recognized a charge of $650,000 to provide sufficient reserve to cover the
expected liability for these claims. The Company also recognized a charge of
$493,000 in 1999 to provide additional reserves for the self-insured portion of
professional liability claims incurred prior to 1998. The Company also wrote off
$690,000 of miscellaneous assets and established a $200,000 reserve related to
the valuation of its inventory balances in 1999.
Lease Expense. Lease expense increased to $15.8 million in 2000 from $15.2
million in 1999, an increase of $651,000, or 4.3%. The majority of the increase
can be attributed to three assisted-living facilities in North Carolina which
were added during the second quarter of 1999. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense decreased
to $8.8 million in 2000 from $9.4 million in 1999, a decrease of $618,000, or
6.6%. As a percentage of total net revenues, general and administrative expense
decreased to 6.0% in 2000 compared with 6.9% in 1999. In 1999, the Company
recognized a charge of $500,000 due to further impairment of its investment in
TDLP. The 1999 period also includes a provision for $275,000 of severance
benefits for a former Chief Financial Officer.
Interest Expense. Interest expense increased to $4.4 million in 2000 from $4.1
million in 1999, an increase of $306,000, or 7.4%.
Depreciation and Amortization. Depreciation and amortization expense increased
to $3.6 million in 2000 from $3.4 million in 1999, an increase of $167,000, or
4.8%.
21
<PAGE> 22
Non-Recurring Charges. In 2000, the Company recorded non-recurring charges
totaling $622,000 in connection with the restructuring of the lease arrangements
covering the majority of its United States nursing facilities and the proposed
refinancing of certain debt obligations. Of this amount, $391,000 and $215,000
related to consulting and legal fees incurred, respectively.
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, income before income taxes and the cumulative effect
of the change in accounting principle was $480,000 in 2000 as compared with a
loss of $11.8 million in 1999, an increase of $12.2 million, or 104.1%. The
effective combined federal, state and provincial income tax rate was 36.0% in
both 2000 and 1999. Net income after taxes and the cumulative effect of the
change in accounting principle was $307,000 in 2000 as compared with a net loss
of $7.8 million in 1999, an increase of $8.1 million, or 104.1%, and basic and
diluted earnings per share was $.06 in 2000 as compared with a loss of $1.44 in
1999.
LIQUIDITY AND CAPITAL RESOURCES
On November 8, 2000, the Company entered into a 10-year restructured lease
agreement (the "Settlement and Restructuring Agreement") with its primary
lessor, Omega Health Investors, Inc. ("Omega"). The Settlement and Restructuring
Agreement, effective as of October 1, 2000, provides for reduced future lease
costs covering 30 of its 61 leased facilities through the term of the lease
expiring September 30, 2010, settlement of unpaid rent, a cancellation of
outstanding letters of credit, and waives all defaults under previous lease
agreements with Omega. The Company has agreed under the Settlement and
Restructuring Agreement to issue Omega a subordinated note in the amount of $1.7
million and 393,658 shares of the Company's convertible preferred stock.
Interest on the subordinated note is payable quarterly and accrues at a rate of
7% per annum with any unpaid principal and interest becoming due September 30,
2007. The Company's preferred stock is entitled to a quarterly dividend at a
rate of 7% per annum and is convertible into common stock at an initial
conversion rate of 1.7949 shares of the Company's common stock for each share of
preferred stock upon demand by Omega resulting in Omega holding up to 9.99% of
the Company's outstanding common stock. The preferred stock also has a
liquidation preference of $3.3 million plus accrued but unpaid dividends and is
subject to redemption at $3.3 million plus accrued but unpaid dividends upon a
default under the lease or on September 30, 2007. The Company has also issued a
$5.0 million subordinated note which accrues interest at a rate of 11.0% per
annum and becomes payable at the expiration of the term of the restructured
lease. The Settlement and Restructuring Agreement provides Omega will agree to
forgive the $5.0 million subordinated note plus any accrued but unpaid interest
upon the transference of specified property and equipment located in the covered
facilities to Omega at the expiration of the term of the restructured lease.
The Company will account for the net effect of the issuance of the subordinated
notes and preferred stock as costs of the restructured lease which will be
amortized over the 10-year term of the lease beginning October 1, 2000.
22
<PAGE> 23
As a result of the Company's execution of the Settlement and Restructuring
Agreement with Omega, the Company amended previously existing loan agreements
with its primary lender. The amended loan agreements establish new promissory
notes and a working capital line for all of the $13.6 million outstanding to the
lender at September 30, 2000 and extends the maturity dates ranging from January
15, 2002 through September 30, 2004. Under the amended loan agreements, the
promissory notes and working capital line of credit will bear interest at a rate
of 9.5% and prime plus .5%, respectively. Effective with the execution of the
amended loan agreement, the Company is now in compliance with its debt covenants
resulting in an additional $38.1 million of debt being reclassified to long
term. Effective with the execution of the amended loan agreement, the Company
is in compliance with the debt covenants related to the $13.6 million owed to
its primary lender and the $24.5 million mortgage payable owed to a commercial
finance company, resulting in $38.1 million of debt being reclassified to
long-term.
The Company anticipates it will incur additional non-recurring charges in
connection with the restructured lease and loan agreements which will be
recorded in the fourth quarter of 2000. See Note 7 for further discussion of
non-recurring charges recorded by the Company.
As of the date of the filing of this Report on Form 10-Q, the Company has an
acquisition line of credit which had amounts outstanding of $11.1 million at
September 30, 2000. No further draws are available under the acquisition line of
credit. Amounts outstanding under this line had a maturity date of April 30,
2000, which had been previously extended. On September 27, 2000, the lender
again extended the maturity date to November 30, 2000. The Company and the
lender are negotiating replacement long-term financing which the Company expects
to have completed prior to December 31, 2000. If the Company is unable to
refinance the acquisition line of credit and the lender demands immediate
repayment, the Company would be unable to repay the related debt outstanding
which would have an adverse impact on the financial position, operations and
cash flows of the Company. This debt is secured by the assets of four facilities
that are owned and operated by the Company.
The Company believes that, as a result of the restructuring agreements and
anticipated acquisition line of credit refinancing referred to above, internally
generated cash flows from earnings and existing cash balances will be sufficient
to fund existing debt obligations through fiscal year 2001.
Net cash provided by operating activities totaled $5.4 million in each of the
nine month periods ended September 30, 2000 and 1999. These amounts primarily
represent the cash flows from net operations plus changes in non-cash components
of operations and by working capital changes.
Net cash used in investing activities totaled $1.8 million and $3.8 million in
the nine month periods ended September 30, 2000 and 1999, respectively. These
amounts primarily represent purchases of property plant and equipment,
investments in and advances to joint ventures and additional investments in
TDLP, a limited partnership for which the Company serves as the general partner.
The Company has used between $2.7 million and $5.2 million for capital
expenditures in the three calendar years ending December 31, 1999. Substantially
all such expenditures were for facility improvements and equipment, which were
financed principally through working capital. For the year ended December 31,
2000, the Company anticipates that capital expenditures for improvements and
equipment for its existing facility operations will be approximately $3.2
million, including $800,000 for non-routine projects.
Net cash used in financing activities totaled $1.6 million and $2.8 million in
the nine month periods ended September 30, 2000 and 1999, respectively. The net
cash used in financing activities primarily represents net repayments of debt
and advances to TDLP.
23
<PAGE> 24
RECEIVABLES
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from Medicare,
Medicaid and other third party revenue sources. The Company's future liquidity
will continue to be dependent upon the relative amounts of current assets
(principally cash, accounts receivable and inventories) and current liabilities
(principally accounts payable and accrued expenses). In that regard, accounts
receivable can have a significant impact on the Company's liquidity. Continued
efforts by governmental and third-party payors to contain or reduce the
acceleration of costs by monitoring reimbursement rates, by increasing medical
review of bills for services, or by negotiating reduced contract rates, as well
as any delay by the Company in the processing of its invoices, could adversely
affect the Company's liquidity and results of operations.
Accounts receivable attributable to the provision of patient and resident
services at September 30, 2000 and December 31, 1999, totaled $16.3 million and
$15.8 million, respectively, both representing approximately 31 days in accounts
receivable. Accounts receivable from the provision of management services were
$781,000 and $412,000 at September 30, 2000 and December 31, 1999, respectively,
representing approximately 71 and 42 days in accounts receivable, respectively.
The allowance for bad debt was $5.1 million and $5.0 million at September 30,
2000 and December 31, 1999, respectively.
The Company continually evaluates the adequacy of its bad debt reserves based on
patient mix trends, agings of older balances, payment terms and delays with
regard to third party payors, collateral and deposit resources, as well as other
factors. The Company continues to evaluate and implement additional procedures
to strengthen its collection efforts and reduce the incidence of uncollectible
accounts.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud abuse. Changes in these laws and
regulations, such as reimbursement policies of Medicare and Medicaid programs as
a result of budget cuts by federal and state governments or other legislative
and regulatory actions, could have a material adverse effect on the Company's
consolidated financial position, results of operations, and cash flows. Future
federal budget legislation and federal and state regulatory changes may
negatively impact the Company.
All of the Company's facilities are required to obtain annual licensure renewal
and are subject to annual surveys and inspections in order to be certified for
participation in the Medicare and Medicaid programs. In order to maintain their
operator's license and their certification for participation in Medicare and
Medicaid programs, the nursing facilities must meet certain statutory and
administrative requirements. These requirements relate to the condition of the
facilities, the adequacy and condition of the equipment used therein, the
quality and adequacy of personnel, and the quality of medical care. Such
requirements are subject to change. There can be no assurance that, in the
24
<PAGE> 25
future, the Company will be able to maintain such licenses for its facilities or
that the Company will not be required to expend significant sums in order to do
so.
Recently, government activity has increased with respect to investigations and
allegations concerning possible violations by health care providers of fraud and
abuse statutes and regulations. Violations of these laws and regulations could
result in expulsion from government health care programs together with the
imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Management believes that the Company is
in compliance with fraud and abuse laws and regulations as well as other
applicable government laws and regulations. Compliance with such laws and
regulations can be subject to future government review and interpretation as
well as regulatory actions unknown or unasserted at this time. In 1999 and 2000,
the Company did experience the increased regulatory scrutiny that has been
exerted on the industry in the form of increased fines and penalties. The
Company has incurred $359,000 and $350,000 in new fines and penalties in 2000
and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
The Company has obtained its financing primarily in U.S. dollars; however, it
incurs revenues and expenses in Canadian dollars with respect to Canadian
management activities and operations of the Company's eight Canadian retirement
facilities (three of which are owned) and two owned Canadian nursing homes.
Although not material to the Company as a whole, if the currency exchange rate
fluctuates, the Company may experience currency translation gains and losses
with respect to the operations of these activities and the capital resources
dedicated to their support. While such currency exchange rate fluctuations have
not been material to the Company in the past, there can be no assurance that the
Company will not be adversely affected by shifts in the currency exchange rates
in the future.
STOCK EXCHANGE
On November 10, 1999, the Company's stock began being quoted on the NASD's OTC
Bulletin Board under the symbol AVCA. Previously, the Company's common stock was
traded on the New York Stock Exchange under the symbol AVC. The Company's common
stock was also traded on the Toronto Stock Exchange ("TSE") under the symbol
AVCU. However, the Company no longer meets the listing requirements of the TSE
and, therefore, effective May 30, 2000, no longer trades on the TSE.
INFLATION
Management does not believe that the Company's operations have been materially
affected by inflation. The Company expects salary and wage increases for its
skilled staff to continue to be higher than average salary and wage increases,
as is common in the health care industry. To date, these increases as well as
normal inflationary increases in other operating expenses have been adequately
covered by revenue increases.
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IMPACT OF THE YEAR 2000
The Company experienced the changeover to the year 2000 ("Y2K") without
difficulty. In preparation for the potential of Y2K related problems, the
Company established a Y2K compliance committee, which was responsible for
identifying such problems and developing remedial or contingency plans to
address them. Working closely with the Company's insurance carrier, the
committee developed a formal, documented plan that was put into place. The costs
of the Company's Y2K compliance program were not material.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information deemed by management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Certain statements made by or on behalf of the Company,
including those contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere, are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. These statements involve risks and uncertainties including,
but not limited to, changes in governmental reimbursement or regulation, health
care reforms, the increased cost of borrowing under the Company's credit
agreements, covenant waivers from the Company's lenders, possible amendments to
the Company's credit agreements, the impact of future licensing surveys, the
ability to execute on the Company's acquisition program, both in obtaining
suitable acquisitions and financing therefor, changing economic conditions as
well as others. Investors also should refer to the risks identified in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as risks identified in the Company's Form 10-K for the year
ended December 31, 1999 for a discussion of various risk factors of the Company
and that are inherent in the healthcare industry. Given these risks and
uncertainties, the Company can give no assurances that these forward-looking
statements will, in fact, transpire and, therefore, cautions investors not to
place undue reliance on them. Actual results may differ materially from those
described in such forward looking statements. Such cautionary statements
identify important factors that could cause the Company's actual results to
materially differ from those projected in forward-looking statements. In
addition, the Company disclaims any intent or obligation to update these
forward-looking statements.
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PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of the report on Form 10-Q are listed in the
Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVOCAT INC.
November 14, 2000
By: /s/ James F. Mills, Jr.
------------------------------------------------
James F. Mills, Jr.
Senior Vice President, Chief Financial Officer,
Principal Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to Sign
on Behalf of the Registrant
28
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<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form
S-1).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-76150 on Form S-1).
3.3 Amendment to Certificate of Incorporation dated March 23, 1995
(incorporated by reference to Exhibit A of Exhibit 1 to the Company's Form
8-A filed March 30, 1995).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to
the Company's Registration Statement No. 33-76150 on Form S-1).
4.2 Rights Agreement dated March 13, 1995, between the Company and Third
National Bank in Nashville (incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated March 13, 1995).
4.3 Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by
reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995).
4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by
reference to Exhibit 1 to Form 8-A filed March 30, 1995).
4.5 Amended and Restated Rights Agreement dated as of December 7, 1998
(incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7,
1998).
27 Financial Data Schedule (for SEC use only).
</TABLE>
